Things you need to know.
- Summer is over – let the games begin.
- Asian, European and US markets is all lower today…
- Saudi’s and Russians pledge to continue production cuts – oil surges past $86/barrel.
- The race is on – will the FED hike or pause?
- Europe entering a period of ‘stagflation’???
- Dollar up, Treasury yields up, gold down.
- Try the Tomato Soup Surprise
The broader market finished the week on an uptick while tech – fought hard but failed to gain any ground on Friday – At the end of the day – The Dow gained 115 pts, the S&P up 8, the Nasdaq fell 3 pts the Russell gained 21 and the Transports added 110 pts.
The NFP – a keenly watched metric showed us that hiring and new job creation – continued to slow over the summer all while the unemployment rate jumped from 3.5% to 3.8% – a big move in one month – but before you go and say – “it’s finally happening…’ understand that the labor force participation rate jumped up as well….going from 62.6% to 62.8% (which was a surprise) – which means that suddenly more people got up off the couch and went looking for work – and when you ACTIVELY LOOK for work (vs. sitting home and collecting gov’t assistance) – you get counted as either employed or unemployed – and all this meant is that the additional people that came back into the work force did not find work (that they wanted) and that allows them to be counted as unemployed – thus the spike in unemployment – this vs. people getting let go and then filing for unemployment and while some of that did happen – it was the surge in the labor force that caused the unemployment rate to jump……….
To be clear – the move up in the labor force participation rate means more people went looking and more people found nothing – which is kind of hard to believe since there are more than 8 million jobs available…. but that’s another subject….
Construction spending rose more than expected at +0.7% while ISM Prices Paid rose as well – going from 42.6 to 48.4 – and all that means is that prices are going up – for businesses and if prices are going up for businesses – you know what that means, right? It means that inflation is brewing and prices at the consumer level will most likely be going higher as well….and that leaves us in a quandary…. What is going on? Is inflation subsiding or is it becoming more entrenched? That is the $64k question….and one that the FED will have to consider at the next FOMC meeting in 2 weeks. (Remember the PPI report also showed rising prices at the producer level)
Friday’s employment data was a ‘win’ for the guys (generic for both men and women) calling for a soft landing – Hussain Mehdi – Macro and Investment Strategist at HBSC Asset Management said the case for a September pause is ‘overwhelming’ (a bit dramatic, no?), Rick Reider – Chief Investment Officer for Global Fixed Income at Blackrock agrees – telling us that the ‘cooling labor market supports speculation that the FED is done raising rates – making bonds more appealing (than stocks). …. all while Cleveland FED President Loretta Mester remains steadfast saying that inflation remains too high despite recent improvements, and a strong labor market…. She went onto say that “Future policy decisions will be about managing the risks and the intertemporal costs of overtightening vs. under tightening monetary policy.”
Wait – did you see it? She threw a new word into the conversation – ‘intertemporal – in this case – it means how current conditions affect what options become available in the future – so do we do smaller hikes now or larger hikes later…?’ Just food for thought…. because if they pause in September (after the PPI and PCE ROSE in July – and we will get August numbers next week ahead of the meeting and they are up and they still pause – then the conversation will be about a 50-bps hike in November…. Capisce? In any event – Loretta (and Neely and Jimmy B – Former St Louis Fed Pres) – have all been calling for a 6% terminal rate for 9 months now…. which is – btw – a 50 bps increase from current levels. In any event – it is what it is….
We are now in the first full week of September and this month has been a historically tough month for stocks….Now, I know that Tom Lee of Fundstrat and Ryan Detrick of Carson Group are telling us that ‘this time it’s different’ – they are not expecting a tough September …..Yeah, my gut says ‘not so much’…..which is what makes this business so fascinating – there are buyers and sellers and its always exciting.
So, as I have been saying – tread lightly – let’s see how it starts. The next FED meeting is 2 weeks away – September 20th…we will have plenty of macro data points to digest. Today bring us Factory Orders – expected to be -2.5%, Durable Goods, Capital Good Ordered and Shipped. Wednesday, we have Mortgage Apps, S&P Global Services PMI at 51.2 (expansionary), ISM Services Prices Paid (this will be one to watch), and ISM Services Employment. Thursday is the usual suspects – Initial Jobless Claims and Cont. Claims and then Friday brings Wholesale Inventories and Consumer Credit.
The Dollar Index is up this morning – gaining 0.4% to trade at $104.62 – leaving it just a hair below the May high of 104.69..….News out of Australia, Canada, the ECB and the FED continue to drive the action…What will all of these central banks do and then how does that effect the dollar? The RBA held rates steady as expected while the BoC, ECB & FED remain vague – expect the focus to be squarely on the coming economic data around the world – hoping for clues as to what happens next.
And as you would expect – Gold is under pressure on the rise in the dollar…this morning it is trading down $8 at $1,958/oz and remains just below the trendline. Recall the Death Cross that happened last week – when the short term trendline (1969) breaches the long term trendline (1976) – suggesting weaker prices ahead. It appears that we could test the August lows of $1,911 again if the dollar continues to strengthen.
Oil rose!! Guess what happened? Well – The Saudi’s and the Russian’s announced that they will extend export curbs and production levels into October….and Chinese manufacturing activity ‘unexpectedly’ EXPANDED in August (think demand)– but still remains in the contraction zone…Officially it rose to 49.7 up from 49.3 in July….but the point is – it rose….and that is in contrast to what many had expected – and if we look deeper into the report – it shows that manufacturing related sub-indexes for production and new orders hit a 5 month high….and that is what caused the excitement….But before you go popping the champagne bottle – the services PMI fell to 51 in July vs. the reading of 53.2 in June – (new orders for that sub-index in services fell to 47.6)…now while the overall read is still in expansionary territory – it is moving in the wrong direction….but that did not seem to cause much concern.
Oil did rise by 2.9% or $2.40/barrel on Friday…to end the day (and week) at $86.05/barrel…It is now up 11% since August 23rd – that was after they sold it off 8% in early August on the weakening China story…this morning it is trading down by 0.3% at $85.26/barrel.
Asian markets ended the day lower……with the exception of Japan which rose by 0.3%. Hong Kong lost 2%, China down 0.75%, and Australia was essentially flat. Think the latest PMI reports out of China….
European markets are also lower this morning as ‘stagflation’ worries take root – following the weaker Asian performance. German trade data showed a decline in exports and an increase in imports…and Eurozone business activity fell to 46.7 (composite PMI) – leaving it in contractionary territory as well. The report details that the services industry contracted for the 1st time this year with a ‘near stalling’ of job growth. At 5 am – European markets are all down. The UK is off 0.15% while France is down 0.75%…everyone else is in between.
At 6:30 am – US futures are down (although up from where they were overnight) …. Dow futures down 65 pts, the S&P’s down 20, Nasdaq is lower by 80 pts the Russell is down 15 pts. The summer is over and the holiday is behind us….expect trading to resume to some sense of normalcy now that everyone is back at their desks…and that means be careful….the exaggerated move up over the past two weeks is vulnerable to a pullback…and with global economies getting weaker – expect reality to begin to set in here as well. My sense is that the 4.5% move up in the S&P over the past 2 weeks is a bit long in the tooth…Again – I’d say proceed with caution…. The short term trendline is at 4469 – which is about 1% lower…a failure to hold will see us test the August lows of 4350 ish…and if next weeks’ CPI & PPI reports suggest entrenched inflation…we can expect to see FED Fund Futures spike higher as the chatter will return to a FED hike on the 20th.
Treasury prices are under pressure causing yields to rise again…this morning the 2 yr. is yielding 4.90% up from 4.85% and the 10 yr. is yielding 4.21% up from 4.11% last week. Remember – when treasury prices decline yields go up and when prices rise yields go down. Shorter duration – 3- & 6-month bills yield 5.46% and 5.5% respectively.
On a side note I have two things to say…last week I commented on Ford’s EV battery and I made a mistake – My friend that owns a dealership in Pleasantville, NY corrected me (Go see him – Joe Angi – tell him I sent you)……so, I am correcting it….….Unlike Tesla’s – when the battery fails – you have to replace the whole thing for about $20k….Ford’s EV battery is built in ‘modular’ construction. So a failure in ONE of the modules only requires that section to be replaced at a far lower cost – making the Ford EV more desirable for the masses….…Now, I don’t’ know about how all the others manufacture their batteries, but it is a good question to ask if you are buying one.
Next – the UAW (United Auto Workers) union is set to negotiate a new contract by next week and they are expected to push hard for substantially higher wages, better benefits and more time off – when they sit at the table…. Otherwise – they are going to walk off the job…. Last night Jo Jo told us that ‘a strike is unlikely’ and that he is ‘not worried about the union striking’. Well Joey, did you realize that the union voted ‘overwhelmingly’ to strike IF a deal is not reached before September 14th and that industry executives ARE bracing for a strike – which suggests that the two sides are still far apart and while so much can happen over the next week – My guess is that the UAW will not back down considering what we have seen at the pilots union (ALPA) and the teamsters union…both negotiated BIG wage increases along with better benefits and time off. And after GM’s CEO Mary Barra – made such a big deal about how well GM is doing, beating estimates, raising forecasts etc.…I am curious to see how they handle this contract negotiation. My guts says that the Union wins….and higher wages etc.…only mean higher prices for the consumer…. (Remember the name Shawn Fain – UAW President).
The S&P ended the day at 4515 up 8 pts….as summer came to a close. Again, I think the moves higher over the past two weeks were a bit exaggerated, so a pullback would not be out of the question. Yesterday – our friends at Goldman cut the odds of a recession by 5% to a 15% chance of one occurring at all as cooling inflation and a strong labor market suggests that the FED is done….I guess they are not listening to Loretta and Neely and the others that continue to believe that while it is cooling, it is not cooling enough.
So, before you bet the ranch – I’d proceed with caution…. Don’t go chasing the names (sectors) that are stretched…. build some boring into your portfolio – because in a volatile market boring is beautiful.
Don’t stress – stay focused, talk to your advisor, remember – this is a long game and there is always an opportunity somewhere.
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.
Tomato Soup Surprise
YUMMMMMM! I made this yesterday and will post my pictures online this morning. (Twitter – @kennypolcari) It is a simple dish – total time from start to finish might be 35 mins.
For this you need – 1 box of 24 oz of Cherry tomatoes, 4 garlic cloves chopped, 1 medium sized red onion, olive oil, 1 can of Cannelloni beans, pignoli nuts water, s&p, Burrata Cheese and a French baguette for toasting.
Start by sautéing the chopped garlic and red onion in a large sauté pan for 3 – 5 mins on medium high…. careful not to burn.
Next add in the cherry tomatoes and cook until they blister and then explode! Remove from the heat…. allow to cool for 5 mins…then add to a blender or food processor and blend until smooth. Return to the sauté pan. Next – turn heat back up to medium.
Add one can of Cannelloni beans – water and all into the pan and stir. Now turn the heat to low and add in a handful of the pignoli nuts and the soft burrata cheese, including the mozzarella shell (you can slice the cheese into small bits and add). Stir to blend it into the tomato soup – making sure to incorporate it as it melts into the soup.
Now – slice open the baguette and toast in the oven – when it’s all nice and golden – remove – slap some butter on it and serve with the bowl of this luscious tomato soup. This is a simple dish for a cool night – trust me – You are gonna thank me for this.
Buon Appetito
